Many employees working for UK employers have had the opportunity to work from other countries, particularly since the start of the pandemic where employees have chosen to return to their home countries.
The Office for Tax Simplification (OTS) has started to collect data on this and could be consulting on changes regarding the tax treatment of these employees.
Recap on current rules
To recap on the current rules, how a UK employer calculates and pays PAYE tax and National Insurance contributions (NIC) for an employee working abroad depends on where the employee is working and how long it is expected they will be working there.
Generally, if an employee is working outside the UK for less than 183 days, they should remain UK resident for tax purposes and the UK employer should continue to deduct UK income tax and social security costs as normal.
Whereas if the employee is working outside the UK for a longer period, then this may affect the employee’s tax residency status. The tax position then becomes more complex, and the employer should seek tax advice in these scenarios to determine their PAYE and NIC requirements.
Another key point for employers to consider is whether the existence of employees working overseas creates a ‘permanent establishment’ for the employer in another country.
This can be the case if an individual habitually concludes on contracts in the employer’s name in another country. Whether this is the case will very much depend on the employee’s role. For example, arguably a sales director is much more likely to meet this criteria than say, a financial controller.
It is an important consideration as if a permanent establishment is created, then any profits attributable to that establishment can be subject to corporation tax in that country, in addition to being subject to UK corporation tax.
OTS review and potential reforms
The review by the OTS is set to examine the extent to which distance working is expected to increase, and consider, in light of these results, at what point the UK should be taxing such individuals.
Some specific points expected to be examined are:
- Which countries currently have primary taxing rights in these scenarios, and when should the UK be taxing should individuals?
- Who is currently paying for travel and accommodation in these scenarios (i.e. the employee or employer) and what is the correct tax treatment?
- What are employers’ policies and procedures in regards to these employees?
To what extent are employees normally based in the UK spending time overseas, and vice versa, to what extent are overseas employees spending time working in the UK?
Further guidance on this will be available as the review progresses, but in the meantime, if you have employees currently working overseas, either full time, or on a split time basis, Rickard Luckin is available to discuss the potential tax implications of this.
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